Austan Goolsbee on the Bush tax cuts, a payroll-tax holiday and what he'd do with $700 billion

Austan Goolsbee was the Robert P. Gwinn Professor of Economics at the University of Chicago Booth School of Business and is currently serving as staff director and chief economist on the President's Economic Recovery Advisory Board and as the chair of the Council of Economic Advisers. We spoke this morning about the Bush tax cuts, using a payroll-tax holiday for stimulus, how to spend $700 billion and what to look for in 2011. A lightly edited transcript follows.

Ezra Klein: You guys attack the Republicans for pushing unaffordable tax cuts, but even your plan would add $3 trillion to the deficit over the next 10 years. How can we afford that?

Austan Goolsbee: Look at the decade the middle class has had, where middle-class incomes fell by $2,000 during an economic boom -- a first in our history. That was followed by the worst recession since 1929.I don’t think, in that environment, you can afford to balance the budget on the back of the middle class. You have to address the long-term fiscal challenges facing the country through the bipartisan commission in some bipartisan way.

EK: But indefinitely? Why not do two or three or four years? That way, when it’s time to let them go, you can do so with a veto, rather than requiring 60 votes in the Senate.

AG: I’m not an expert political strategist. I’m just a policy guy. I think the long-term squeeze on the middle class is the most pressing problem facing the sustained growth of the country. But the main way we’re going to balance the budget is ask the middle class to pay for it? You can’t look at the economic performance of the middle class over the last 10 years and think that’ll work.

EK: But on the point of middle-class incomes, the Congressional Budget Office looked at the question and concluded that extending the tax cuts indefinitely would lower incomes by 2020. In other words, it would actually hurt the economy.

AG: As you know, behind any statement like that is some model. In their model, they’ve made an assumption of what deficits do to the interest rate, and my understanding is they’re assuming a relatively significant impact. We’ve had a major deepening of the world capital market in recent years, and so the impacts of tax cuts on the interest rate may not be as big as they’re assuming. If you take a step back, the underlying fiscal crisis facing the country is driven by health-care inflation and entitlement spending. And so we need some outcome from the fiscal commission. But the center of that effort can’t be balancing the budget on the back of the middle class.

EK: The CBO also said that extending all of the tax cuts, including those for income over $250,000, would do less damage to the economy than just extending the middle-class tax cuts. Obviously you disagree, but why?

AG: Having been a major player in, and studied the academic evidence on, how people respond to changes in tax rates, I don’t think the old-style argument that high-income people have big responses to small changes in tax rates is warranted by the evidence. Even a casual look at our experience in the '90s and the 2000s suggests that high-income marginal tax rates aren’t the primary drivers of growth. Bill Clinton raised rates on exactly this group that we’re talking about, and it did not have a significant negative impact on the growth of the country. Then, in the 2000s, we cut high-income tax rates by as much as they’ve ever been cut, and we certainly did not experience a massive renaissance in economic growth. There should be a higher burden of proof on people saying that rates going up by four points on income above $250,000 will have a huge negative effect.

EK: When we talk about the tax cuts, there tend to be a few arguments that get rolled together. One is that it’s good for the middle-class to have some tax relief. Another is that the cuts encourage economic growth, which was the original argument from the Bush team. And then there’s the question of short-term stimulus. Are they good stimulus?

AG: Virtually every analysis that exists on the impact of various kinds of tax cuts on restarting the economy shows that very high-income tax cuts are dead last on any measure. The evidence is overwhelmingly clear that if you had $700 billion to spend to try and get the growth rate up, you would not spend it on that.

EK: Where would you spend it?

AG: The fundamental uncertainty in the business world is about where the economy will go in the short run. It’s uncertainty about demand. Knowing there won’t be a tax increases on 98 percent of people is a start. But that’s outside your $700 billion package. The president’s proposal to cut small business taxes and make credit available to them, to encourage R&D investment in the U.S., the tax credit for business investing and plant building, and the infrastructure investment, I think that’s a very reasonable place to invest the money. I don’t know if that’s exactly $700 billion, but it’s far more directly beneficial to the economy than is just handing out $700 billion to very high-income people. We need to be easing the uncertainty for businesses worried about demand, not easing the uncertainty for a person making $500 million a year who is worried they’ll have to pay a bit more in taxes.

EK: What about a payroll-tax holiday of some sort?

AG: We passed the HIRE Act, which was a payroll-tax incentive for businesses that hired new workers. As with any tax policy, you want your goal to be not to spend a lot of tax revenue subsidizing things people were already going to do. The good side is that focusing on the middle class, on companies trying to encourage investment in this country. That makes sense. The president’s view was to try and encourage investment. That’s why we went with the R&D credit, business investment incentives and infrastructure investment in our proposal.

EK: There’s been some evidence coming out lately that when a country needs to balance its budget, spending cuts are better than tax hikes. We’ve seen this from Alesina at Harvard, from the IMF and from the CBO. Do you think that’s right?

AG: People are getting way out in front of the evidence on this. Those comparative studies are mainly on very small economies, nations that are 1/50th or 1/100th the size of the U.S. And what little countries did to deal with their imbalances are frequently not available for giant economies like the U.S. or Japan. More intense research shows that the primary way countries get out of fiscal holes is by increasing their growth rate. To posit that you have to either substantially cut spending or raise taxes belies the fact that what really matters is debt-to-GDP. In the U.S., we’ve often reduced that ratio without running surpluses by getting the growth rate up. The growth rate is a critical component of fiscal sustainability. The fiscal policy you can sustain depends on how big your GDP growth is.

EK: Looking at 2011, what are you optimistic about? What are you worried about?

SG: As Warren Buffett has said, in 1900, the Dow was at 50. In the intervening decades, we had World War I, a depression, World War II, flu pandemics, oil shocks, Vietnam. A lot of really major, negative things happened. And yet, by 2010, the Dow is at 10,000. The ultimate generative capacity of the U.S. economy is based on innovation, the quality of our workforce, the vibrancy of our markets, and how entrepreneurial our people are. And those things remain. We also have going for us the normal self-correcting mechanisms of recessions. People need to replace their cars, to get married, have children. Those underlying trends are in our favor. Second, the president has done a lot of things over the past few years to stop the freefall in the economy, which worked, and encourage the private sector to stand up, which we’ve done a lot on and have to keep pushing on.

Housing is a concern. Prices seem to have stabilized, but it remains a troubled area as there are a lot of vacant houses. State fiscal situations are very precarious. We’ve had eight months of private-sector job growth after 20 months of losses, but it’s getting balanced off by the trouble in state and local employment. In the first three months of this year, the data were coming in better than expected. Then there was the crisis in Europe, which shook confidence and the markets. The developed world remains in a tough spot. So international growth remains a concern for our exports.

The business cycle in the 2000s was driven by consumer spending faster than income growth and residential housing investment, and that was unsustainable. And so we’re trying to point to an older-style of recovery that’s business-investment driven, where consumption growth is proportional to income, and then a push on exports. Those three things can sustain a boom, but on each of those, there are reasons to be optimistic, but there are dangers. For the exports, if there’s no growth out of Europe, that’ll be a concern. On the investment side, there’s money on the sidelines, but there’s an uncertainty that demand isn’t there. And I’m optimistic on proportional consumption growth, as we had a pretty dramatic increase in the savings rate.

Klein, I give kudos for the first line of questioning in re cost of extending bush tax cuts for below $250k. Although the follow-up would have been, if "the center of that effort can’t be balancing the budget on the back of the middle class", then musn't it necessarily be "ending Medicare/Medicaid" as we know it. There simply isn't enough benjamins at the >$250k level, even if you assume a static analysis when you raise rates to 75%/80% to get the deficit below 3% of GDP.

The story over at the Weekly Standard (http://www.weeklystandard.com/blogs/inspector-general-will-investigate-obama-admin-discussing-koch-tax-status_500861.html) cites a letter from the Treasury Department's Inspector General agreeing to begin to investigate the charge "that an Obama administration official [Goolsbee] may have improperly accessed and discussed private taxpayer information."

The long term growth rate will slow, but I agree with Goolsbee that there is no evidence of catastrophic changes (though GDP growth was quite choppy in the early 1990s - the first nine months of 1993 and 1995 both averaged 1.8%).

Goolsbee:
"The business cycle in the 2000s was driven by consumer spending faster than income growth and residential housing investment, and that was unsustainable."

So then, pray tell Mr. Progressive economic expert, why on God's green earth would you think it's 'sustainable' to have a government cycle as far as the eye can see where government spending will outstrip incomes (and the taxes paid on them)??

I agree with Goolsbee, by the way, that the root of the financial crisis was people spending money they didn't have. Think about it:
- the root of the Great Recession was the housing crisis.
- the housing crisis ensued when a higher-than-normal number of people couldn't afford their mortgages.
- They couldn't afford their mortgages because they had no savings to dip into when they lost a job, or their interest rate went up.
- They had no savings because they were living on credit cards!!

Where I depart from Mr. Goolsbee (and Ezra) is the contention that somehow governments are different, that a government can continue to spend money they don't have for infinity, and never face negative consequences.

I'm still looking for a Keynsian who truly believes in Keynsian economics. Keynes believed in deficit spending. But Keynes also believed in saving surpluses in the good years, so that over time governments had long-term balanced budgets. The problem is that politicians LOVE the spending part (Republicans too, but especially Democrats), but not so much the 'saving' part.

Democrat candidate Lee Fisher, running for the Ohio Senate seat being vacated by Voinovich, uttered a gem during a televised debate last week that perfectly captured the core beliefs of progressives like Ezra.

When the Republican (Rob Portman) offered support for extending Bush's tax cuts for all income levels, Fisher (in pure Ezra style) uttered the phrase "so, he wants to give $700 billion dollars to the wealthiest Americans."

Folks, there you have progressive-statism in a nutshell. They believe your money rightfully belongs to them (the ruling class). Tax cuts equal 'giving' you money.

This is a philosphy you should recognize when you hear it, and fight against it for all you are worth. Your money is YOUR money, and politicians have a duty to be responsible with YOUR money. It does not belong to them, it's arrogant to believe as progressives do that tax policy is simply the decision of how much money to 'give' you!!

Here's what I worry about with the break point at $250K, not say $1M or more. People in that gap aren't rich; they are upper middle class. They spend more to keep up with a life style to which they have become accustomed. Take their money and you reduce AD.
Maybe Buffet won't care if he pays more taxes (as he seems to support) because he can still have anything in the world he wants. Not so true of a middle aged professional with a huge mortgage, college tuition to pay and and spending habits that leave little room for desirable savings.
And why are we so opposed to to families saving some of their money?

Great interview, Klein. I'm generally keen on repealing all the Bush tax cuts, but Goolsbee really strikes a chord with this:

"But the main way we’re going to balance the budget is ask the middle class to pay for it? You can’t look at the economic performance of the middle class over the last 10 years and think that’ll work."

Our economic house of sand isn't going to be rebuilt anytime soon. And as we've seen over and over and over again, it's the middle and lower classes that keep getting dragged out by the tide.

There's a basic and ugly sleight of hand here. What is middle class? A range around $60,000 family income. By any reasonable definition, the top 20-25% are the rich, the mid 60% or so are middle class, and the bottom 20%-25% are poor. Top 20-25% is above $100,000 family income.

But the New Democrats also define middle class to include those at $249,000. That is, they will tax the top few percent, but not the broad wealthy. Arlington has an average income of $108,000--that is rich--and it votes 2-1 for our supposedly left-wing party because that party represents Arlington's economic interests. Goolsbee is a University of Chicago economist defending the interests of his and Obama's wealthy Hyde Park. And then they piously will cut the pensions of physical workers who wear out by raising the retirement age and have a regressive VAP.

Read the AP story and ask yourself why white working class is going to vote Republican by 22 points. They know Bush had a $1.3 prescription drug program and Obama cut it by $500,000 and his wife is into organic gardens to offend our farmers. They know Obama is only for a rise in the stock market (that is, for a rise in S & P profits, half of them earned abroad and for "lower unit labor costs.") But Goolsbee piously talks about taxing the $500,000.

dbw1 wrote>>>When the Republican (Rob Portman) offered support for extending Bush's tax cuts for all income levels, Fisher (in pure Ezra style) uttered the phrase "so, he wants to give $700 billion dollars to the wealthiest Americans."
Folks, there you have progressive-statism in a nutshell. They believe your money rightfully belongs to them (the ruling class). Tax cuts equal 'giving' you money.

Huh? Fisher is right - the middle class would be paying for the Billionaires tax cut. The wealthy didn't create jobs after Republicans gave them 2 tax cuts. Instead they invested their tax cuts in cheap labor companies shipping MIDDLE CLASS jobs overseas!
Get off the Fox crack and get the Facts!

Does he consider seniors part of the middle class? I infers that he doesn't want to balance the budget on the backs of middle class but instead wants the "Cat Food Commission" to recommend cuts to the income of those on Social Security?

You can only conclude he wants to balance the budget on the back of Social Security which hasn't added a dime to the deficit.

Republicans should be running commercials in every local election about Goolsbee's plan to cut Social Security!!!!

Hey dbw1, Clinton and every President since WWII actually decreased America's debt as a % of GDP with the notable exception of beloved supply-siders Reagan and both Bushes, who managed to increase America's debt a cumulative $9.2 Trillion and did it on an impressive 20-for-20 deficit budget record.

Look, all you would be economists, the revolutionary "supply-sider" cool-aid philosophy that Arther Laffer coaxed President Reagan (who I voted for 2 times), the Bushes and nearly all current Republicans into drinking suggests us that cutting taxes to the bone for businesses and the super rich will actually increase GDP and the net income to the public sector.

One problem: it didn't work!

Study the slide show at http://zfacts.com/p/318.html
What economist Steven Stoft presents makes it clear that cutting taxes alone does not work! Investment in infrastructure to make the economy grow is the key.

Hey dbw1, Clinton and every President since WWII actually decreased America's debt as a % of GDP with the notable exception of beloved supply-siders Reagan and both Bushes, who managed to increase America's debt a cumulative $9.2 Trillion and did it on an impressive 20-for-20 deficit budget record.

Look, all you would be economists, the revolutionary "supply-sider" cool-aid philosophy that Arther Laffer coaxed President Reagan (who I voted for 2 times), the Bushes and nearly all current Republicans into drinking suggests us that cutting taxes to the bone for businesses and the super rich will actually increase GDP and the net income to the public sector.

One problem: it didn't work!

Study the slide show at http://zfacts.com/p/318.html
What economist Steven Stoft presents makes it clear that cutting taxes alone does not work! Investment in infrastructure to make the economy grow is the key.

dbw1 wrote: "I'm still looking for a Keynsian who truly believes in Keynsian economics. Keynes believed in deficit spending. But Keynes also believed in saving surpluses in the good years, so that over time governments had long-term balanced budgets. The problem is that politicians LOVE the spending part (Republicans too, but especially Democrats), but not so much the 'saving' part.

Common sense continues to elude the progressives."
******************************************
It was not the 'progressive Keynesian' who did away with the budget surplus. It was the 'regressive supply-sider' who couldn't stand the fact that revenue was exceeding spending and could be used to pay down debt. No, they had to not only wipe out the surplus revenue but also create huge deficits that drove the debt even higher. Don't blame Keynes, he was right. The spender of last resort in economic downturns is government. Consumption (spending) is the fuel of an economy. Saving or paying down debt stabilizes growth. The U.S. does not have a sovereign wealth fund like the oil-rich nations. We do not have an interest bearing investment account like they do. Taxes are the only income that pays for the day-to-day operation of government and paying off any national debt created by various excess spending activities (like wars on credit).

I would rather see all the tax cuts expire than see the tax cuts for the upper class extended to the tune of $700B. I am willing to invest the additional $3,000 it gives me if the government can make the investments (infrastructure spending) that will spur the economy, get people back to work and fuel that consumption engine that drives the economy.

By the way, today's Republican antics have ensured that I will never vote for anyone running as a Republican for national office. They have been bought and paid for by wealthy business interests and will never represent the economic middle and lower class. Government cannot run on credit, deficits to matter even when you hide them by keeping them out of the budget through special emergency appropriations. The truth is, every time the NEOCON Republicans gain control they trash the economy.

Your post is so strong, I copied it will forward it to my contact list so they can get the earful they need.

Democrats need to vote now like never before!

The Republicans are in the tank fo big business and the special interests of the rich. Worse, neither of those care about or are beholden to keeping America strong...they invest the tax cuts we give them globally wherever their return is highest. Other than America being another market to extract profits, they could care less about our society and our people.

Under the Republicans we can expect and ever-increasing income gap, deferred investment in modernizing America's infrastructure, a continued off-shoring of American jobs and technology, higher debt and a further eroded middle class.

The modern Republican party has gone nuts and are nothing like the pre-Reagan conservatives of old. They are absolutely dangerous for America and Americans.

Isn't housing the problem behind the problem? It is where the problem started, and is what burst over our heads, and caused collateral problems. There are some 5.2 million mortgages in default, or close to it. And even for those who are not in threat of losing their mortgages, they are surely feeling pressures and fears, from real estate taxes that are continuing to rise even though the market is plunging; and from jobs that are not so secure as they once were. And doesn't housing spending extend like octopus arms, into the broader economy? And isn't it what is keeping the banks from getting back to business?

So, wouldn't it make sense to throw primary attention and planning to the housing situation? How can we fix business without fixing the customers, and their security?

Paultaylor1 makes a good point, we need the tax dollars to be investment right here in America, not in some business venture in Dubai or China or India or in some supe rich guy's offshore bank account. We need to put America to work again so we can be consumers and pay for things again - including our over-inflated mortgages on houses that became way overvalued due to the bubble caused by the ridiculous exotic loans and aggressive lending techniques employed by the banking and real estate market.

It's all interrelated, but the bottom line is: American needs to invest in America again - starting now!

More tax cuts won't get us there - especially ones for the already rich and businesses.

Very disappointed that there was no mention of the bloated military budget and the trillions spent on the wars in Afghanistan and Iraq and their impact on the budget and and the economy.Instead,the president's budget commission appears to be focused on what many derisively refer to as entitlements,but these programs are a basic safety net for tens of millions of Americans.Cut the military budget by 5% a year for ten years,get out of Afghanistan and Iraq ASAP,increase tax rates progressively for those earning more than $250,000 a year and the country will have the resources to invest in endeavors that will grow the economy,get Americans working again and paying taxes,decrease the deficit and debt and benefit the working and middle class: infrastructure,development of a green 21st Century competitive economy,education,and research and development.

Goolsbee is all mumbo-jumbo and another pie-in-the-sky unrealistic liberal "thinker". We can't balance the budget on the backs of the middle class? I guess he just can't stop saying stupid stuff if he was trained to believe it is true.

Here is the only truth: The debt is 13.5 trillion dollars and the deficit is 1.5 trillion. If you don't cut spending tremendously, those horrible numbers are only going to get a hell of a lot worse and soon. The tax issue is a minor factor in the overall problem - whether you are talking about under or over 250K or whether having any discussion about personal tax policy at all.

The middle class is sinking from the weight of government sanctioned big business control over our lives and because of the suffocating unnecessarily burdensome tax and spend policies of the federal government.

Everybody should stop thinking of the democrats or republicans as agents of change for these seemingly insurmountable problems. Both parties got us here and both parties are controlled by special interests and are dysfunctional. Demand more!

The Washington Post is a "pop" publication. There is nothing investigative going on here.

Goolsbee is all mumbo-jumbo and another pie-in-the-sky unrealistic liberal "thinker". We can't balance the budget on the backs of the middle class? I guess he just can't stop saying stupid stuff if he was trained to believe it is true.

Here is the only truth: The debt is 13.5 trillion dollars and the deficit is 1.5 trillion. If you don't cut spending tremendously, those horrible numbers are only going to get a hell of a lot worse and soon. The tax issue is a minor factor in the overall problem - whether you are talking about under or over 250K or whether having any discussion about personal tax policy at all.

The middle class is sinking from the weight of government sanctioned big business control over our lives and because of the suffocating unnecessarily burdensome tax and spend policies of the federal government.

Everybody should stop thinking of the democrats or republicans as agents of change for these seemingly insurmountable problems. Both parties got us here and both parties are controlled by special interests and are dysfunctional. Demand more!

The Washington Post is a "pop" publication. There is nothing investigative going on here.

Team Obama is becoming more and more similar to the James Buchanan and Richard Nixon regimes. We have learned this week that Obama withheld information regarding the oil spill; all kinds of garbage was thrown into OBAMACARE (and we still do not know the full ramifications of this socialist move!) without the knowledge of the American people; and now this!

FOR PETE'S SAKE! Austan Goolsbee is THE CHAIRMAN OF THE Council of Economic Advisers!! This guy should go to JAIL if he violated privacy laws.

HOW CAN WE TRUST OBAMA WITH HIS HEALTH CARE PROGRAM WITH ALL OF OUR PERSONAL RECORDS IN THE HANDS OF OBAMANITES????

QUESTION: WILL NOVEMBER 2 BE A REFERENDUM ON OBAMA??
ANSWER: YOU JUST BETTER BELIEVE IT CLYDE! There are some good people who are going to lose as a result of their close association with Obama/Reid/Pelosi!

Is Obama trying to see just how far he can go to avoid impeachment??? HE MAY LOSE!!

Underlying the housing crisis was the reduction in interest rates by Alan Greenspan and the Fed. Credit (in all forms) was too easy. What people didn't understand was that real wages were being reduced by a combination of factors. A solution to that problem is that people worked more hours when they could. This resulted in a lessening of quality family time for many. Disruptions in family life lead often to divorce and emotional problems.

A second way was to buy more on credit. Since 2000, use of credit has increased dramatically.

It's really a house of cards, whose foundation is partly ignorance and trust. When the housing bubble burst, all suppositions went out the door.

putzel wrote: "Both parties got us here and both parties are controlled by special interests and are dysfunctional. Demand more!"

That's simply not true. The Democrats and, franklky, every government - Republican and Democrat - REDUCED the debt and size of government compared to GDP up until Reagan/BushI. Then Clinton reduced government again and got us back into surpluses - until BushII started up with "Supply-Side" cut taxes for the wealthy scheme when debt and size of government increased again! Then our economy tanked and the current Administration has arrested our free-fall but the job growth isn't sufficient yet.

See the slide show at http://zfacts.com/p/318.html

The beloved supply-siders Reagan and both Bushes, who managed to increase America's debt a cumulative $9.2 Trillion and did it on an impressive 20-for-20 deficit budget record.

The revolutionary "supply-sider" cool-aid philosophy that Arther Laffer coaxed President Reagan (who I wrongly voted for 2 times), the Bushes and nearly all current Republicans into drinking suggests us that cutting taxes to the bone for businesses and the super rich will actually increase GDP and the net income to the public sector.

One problem: it didn't work!

See the slide show at http://zfacts.com/p/318.html
What economist Steven Stoft presents makes it clear that cutting taxes alone does not work! You simply cannot cut your way to an increased GDP. Certainly, cutting wasteful spending is extremely important, but GROWTH is the only thing that will save America - and that requires us to INVEST. Investment in infrastructure to make the economy grow is the key right now.

Don't you just love a lib, "where will you spend the 700B, stop it, stop it, you butt holes have spent enough, GOP/DEM's who cares who is in they all spend like Drunk, no never mind that insults the drunken sailors.

We encourage users to analyze, comment on and even challenge washingtonpost.com's articles, blogs, reviews and multimedia features.

User reviews and comments that include profanity or personal attacks or other inappropriate comments or material will be removed from the site. Additionally, entries that are unsigned or contain "signatures" by someone other than the actual author will be removed. Finally, we will take steps to block users who violate any of our posting standards, terms of use or privacy policies or any other policies governing this site. Please review the full rules governing commentaries and discussions.